CHAPTER
VII
CONSTITUTIONAL LIMITATIONS UPON THE TAXING POWER
Apart from Art 265 and the limitations imposed by the
division of the taxing power between
Legislature by
the relevant entries
the Union and the State
in
the Legislative
list,
the taxing power of either Legislature is particularly subject
to the following limitation imposed by particular provision of
our constitution.
(i)
It must not contravene Art 13.
(ii)
It must not deny equal protection of the laws (Art 14).
(iii )
It must not constitute an unreasonable restrictions upon
the rights of business [Art 19(l)(g)].
(iv)
No
tax
shall
be
levied ov^the
proceeds
of
which
are
specifically appropriated in payment of expenses for the
promotion or maintenance of any particular religion or
religions denomination. (Art 27).
(v)
A State legislature or any authority within the State
cannot tax the property of the Union (Art 285).
(vi)
The Union cannot tax the property and income of a State
(Art 289).
(vii)
The power of a State to levy tax on sale or purchase of
goods is subject to Art 286.
(viii)
Save
in
so
far
as
Parliament
may
by
Law
otherwise
provide a State shall not tax the consumption or sale of
electricity in the case specified in Art 287.
(ix)
Imposition of
tax should not impede
the free
trade. Commerce and intercourse (Art 301).
(x)
Levy of tax must not offend Art 304 (a).
flow of
It is observed that taxation laws are chailanged being
violatine of above Arties in a good number of cases.
In
Bengal
Supreme Court
Immunity-Co
had held
of
V
State
that no state,
State, would be competent
course
Ltd.
inter-state
and
Bihar,^
including
to impose sales
trade
of
the
the delivery
tax on goods in the
comence
unless
Parliament
lifted the ban as provided under Art 286. It was held that the
operative
provisions
of
the
several
parts
of
Art
286
of
the
constitution namely clause 1 (a) clause (b) and clauses 2 and 3
were intended
to deal with different
have projected or read
topics and one could not
into another.
The bans
imposed by Art
286 of the constitution on the taxing powers of the States were
independent
over
and
before
a
separate
State
and
each one
Legislature
of
them had
could
to be got
impose
tax
on
transactions of the sale or purchase of goods. The Explanation
to
Art
there-in
286
(1)
the
(a)
situs
determined
of
the
sale
by
in
the
the
legal
case
fiction
of
created
transactions
comming within that category and once it was determined by the
application of the explanation that a transactions was out side
the State,
it followed as a matter of course
that the State,
with reference to which the transaction could thus be predicted
to be outside it, could never tax the transaction.
In
certain
the interest of the national economy,
Art 286 places
restrictions
of
on
the
plenary
power
Legislatures to make laws with respect to Sales tax.
26. AIR 1955 SE 661.
the
State
49
To remove
in
1956
by
the chaos and confusion, Art 286 was amended
the
constitution
sixth
amendment Parliament was
empowered
purchase
of
than
purchase
takes place
and
also
was
goods
other
news
Amendment
to levy tax on
papers
where
in course of interstate
empowered
to
formulate
by
of
interstate
trade
or
law
commerce.
By
this
the sale or
such
sale
or
trade or commerce
determining when a sale or purchase of goods
course
Act.
principles
take place
for
in the
Accordingly
Central
Sales Tax Act 1956 was passed by the Union Parliament.
In
Taxation
Act,
Atiaban
(on
1954,
Supreme
goods
was
Court
Tea
carried
road
being
struck
It has
State
by
challenged
has
unconstitutional.
V
Co
or
business
of
growing
exporting it to Calcutta.
and
the
Assam
Inland Water
Ways)
of
said
manufacturing
301
Art
Act
as
liable
Taxation
imposed
on
tax
and
being
out
Tea
in
side
Assam
In the course of its passing
the Tea was
which
The
the appellants carried on
the State of Assam,
Act
on
27
held that tax laws are not
the perview of Art 301. In this case,
the
Assam.
violative
down
been
or
to tax under
goods
carried
by
and
through
the Assam
road
or
inland water ways in the State of Assam. The Supreme Court held
that
the
transport
Act was,
27.
tax
imposed
or movement
on
and
the
goods
thus
directly
offended
passed
against
Art
on
their
301.
The
therefore, held void and the State was restrained from
AIR 1961 S.C. 232.
50
l e vy in g
the
gadkar,
J
by
On
indirect
be
the
or
that
on ly
such
would
valid
o t he r
the
of
within
it
h ad
a re
on
Article
that
304
19(1)
(g)
AIR 1964 S.C. 925.
as
the
(1)
because
freedom
sanction
the
of
above
in
that
but
it
trade
tax
is
that
in
the
o nl y
be
(b)
in
the
inte re st
the
tax
had
i.e.
been
President.
The
The
A s s am
following
(on
The
g oods
the
carried
validity
of
Tea
V
provisions
guaranted
is
w o u ld
304
constituted
constitution
is
Art
Khyerbari
fundamental
of
pointed
it c o u ld
Ac t
1961.
the
trade
was
the
the
Taxation
A ct
which
trade
conditions.
the
Assam
they
of
trade,
proposing
the
of
S i n ce
r e a s o n a b l e and
B i ll
directly
impact
restrict
r e q u i r e m e n t of
way s)
petitioner's
of
of
is
or m o v e m e n t
restrictions,
301.
flow
challenged
grounds
the
Art
which
as
Art 301. It
to
ammended
Water
again
the
the
fulfilled
unconstitutional
(2)
also
n ot
two
on
of
flow
movement
of
Gajendra
f re e d o m
having
immediately
were
previous
I nl an d
on
restriction
a nd
trade
the
A rt
was
and
the
h ad
of
amount
satisfied
subsequently
Act
Assam
do
purview
a nd
of
free
or
purview
judgment,
restrictions
the
flow
free
on
such
imp ed e
the
with
requirement
of
the
public
Act
or
a nd
be
free
the
affected
Legislature
amended
the
his
restrictions
as d i r e c t l y
introduced
road
or
taxes
general
by
would
may
restrictions
impunged
on
of
restrictions
hand,
within
case,
if
that
301,
r em ot e
course
taxes
fall
instant
the
restrict
permissible
out
28
Art
immediately
trade.
In
explained
guaranteed
and
tax.
an
of
State
the
Act
unreasonable
by
rights
Co.
this
Article
guaranteed
i nf ringed.
Th e
301
by
Supreme
5t
Court repelled these two contentions and upheld the validity of
the
Act.
In
this
case
the
Supreme
Court
has
laid
down
a
guideline under what circumstances and in what manner the Court
should
interfere
of course,
in
these matters.
The
Court
if the said
14,
19 and Art 3U'l,
tax directly and immediately imposes a restriction
the freedom of
to
"It is
true that the validity of tax law can be questioned
in the light of the provisions of Articles
on
observes:
down
strike
provisions
of
trade,
a
Arts
but
the power conferred
taxing
statute
14,
or
19
if
301
has
it
to
be
bearing
levy
the purpose of Governance and
for
the court
the
contravences
circumspection,
taxes
on
exercised
wi th
in mind that the power of the State
to
for carrying out
its welfare activities is a necessary attribute
of sovereignty
and
character.
in
where
that
the
sense
court
unreasonable
citizen,
is
is a power
satisfied
restrictions
conferred
introduced
amounted
it
on
to
colourable
paramount
that
the
unbriddled
unconstitutional
of
on
the
impunged
fundamental
the
exercise
of
right
appropriate
discrimination
and
Act
in
legislative
But
imposed
of
the
authorities,
consequence
power,
such
a
taxing statute can properly be regarded as purely confiscatory
and
the
power
of
the
exercised. "Further,
Court
can
be
legitimately
involved
and
the legislature which is competent to levy
a tax must inevitably be given full freedom to determine which
articles
should be taxed,
would
be
idle
order
to tax something.
and jute are
to contend
in what manner and at what
that a state must
Thus when
the main products
of
rate.
It
tax everything
in
it is not disputed
the state of Assam,
that
tea
and the
State Lagislature selects these two articles for taxation under
52
section 3 of the Assam Act 10 of 1961,
down
as
discriminatory
and
as
the tax cannot be struck
such
unconstitutional
only
because it has taxed these two Articles".
/•
In
the
Legislature
same
can
retroactively
case
etMow
and
the
a
Supreme
statute
thereby
Court
with
entitling
has
said
provisions
the
State
that
to
the
operate
to recover
tax
which could not be recovered under the earlier Act owing to its
constitutional infirmities.
The
scope
of
Art
Court
in
Automobile
There
the
majority
was
Transport
held
compensatory
taxes
hamper
commerce
trade
301
for
that
the use
and
again
Ltd.,
defined
V
State
regulatory
of
the
of
Rajasthan
measure
trading
inter-course
by
of
Supreme
imposing
facilities
but
rather
29
did
not
facilitated
them and therefore were not hit by the freedom declared by the
Art 301.
In State
imposed
tax
challenged
of Assam,
on
motor
V Labanya
vehicles
Prabha
in
30
, the
Assam.
impunged Act
The
petitioner
the tax as violative of Art 301. The court rejected
the plea as the said Act was only regulatory measures
compensatory
taxes
for
course .
29
AIR 1962, S.C. 1406.
30
AIR 1967, S.C. 1575.
facilitating
trade
commerce
imposing
and
inter­
53
Art
304
(a)
laws a f f e c t i n g
e n ables
trade,
the
c o m m e r c e a nd
i m p o s i t i o n of taxes on g o o d s
in
the
state
are
discriminate
the
that
state
Thus
in the case of sales
of
a
to
similar
goods
the goo d s w h i c h
sta t e
inter c o u r s e .
from o t h e r s t a t e s
subjected
between
and
legislature
It e n a b l e s
taxes,
imported
the
if s i m i l a r goods
manufactured
are
to m a k e
so
or
as
not
to
producted
in
from o t her
tax i m p o s e d by the Sta t e s ,
states.
it w i l l be
v a l i d only if it comes w i t h i n the terms of Art 304 (a).
Th e
Supreme
Electronics
and
notification
of
which
was
held
Court
Anr
in
V
a
very
State
recent
of
judgement
Gujrat
31
in
weston
quashed
the
the G u j r a t
G o v e r n m e n t u n d e r G u j r a t Sale T ax
Act
to
in
and
be
not
conformity
with
Art 304 (a)
t h e r e b y bei n g v i o l a t i v e of Art 301.
In
goods,
this
case,
including
are
India,
sold
originally
upto
and
sold
the
state.
basis
rate
31
of
of
within
No
sales
the S t a t e
1981,
on
the
State
distinction
the p l a c e
electronic
sets,
organisations
television
of G u j a r a t
of m a n u f a c t u r e .
goo d s
(1988) 25 STL 192 (S.C.)
The
sets,
made
entering
electronic
cameras
l o c a t e d at D e l h i and
of G u j a r a t .
w as
manufacture
television
T h e f a c t o r i e s are
through
including
petitioners
television
television monitors.
g o ods
the
or
r a t e of
whether
all
tax was
the
over
15X
manufactured
i m p o r t e d from o u t s i d e
between
However,
the
spread
and
State
the
in
goo d s on
1981,
for
while
sale
the
the
therein
54
was
maintained
at
15%
the
rate
in
respect
of
Locally
manufactured goods was reduced to 6% by Notification No (GHN51 GST 1081 (S .49) (109) TH issued u/sub-s. (2) of s.49 of the
Act.
The Notification introduced a new entry in the schedule
dealing specifically with electronic goods manufactured in the
State ofGujarat. Thereafter in 1986 the rate of
sales tax in
respect of television sets imported from outside the state was
reduced from 15% to 10% and for goods manufactured within the
State the sales tax was reduced 1% by Notification No. (GHN
22)
GST 1986/(S.49) (73)-TH dt. 29th March 1986. (Paras 1,2,3.).
The same was challenged by
that
by
lowering
the
rate
the petitioner on
oftax
in
respect
the ground
of
goods
manufactured within the State, the State Government has created
an
invidious discrimination which
free
flow of
is
adversely affecting
inter-state Trade and commerce,
contravention of Art 301 of the Constitution.
out
that
a
purchaser
buying
a television
resulting
the
in a
It was pointed
set manufactured
within the State of Gujarat pays about R s . 250/- to R s . 300/less for a black and white
model and R s . 750/- to
R s . 1000/-
for a colour model. It was
said that the sales of
electronic
goods manufactured by
the petitioner have been prejudicially
affected within the state of Gujarat. (Para 3).
Held, allowing the writ petition that it is apparent that
while a State Legislature may enact a law imposing a tax on
goods imported from other states as is levied on similar goods
manufactured in that state, the imposition must not be such as
55
to
di sc ri mi na te between
manufactured.
was
to
The
reduced
in
provide
units
is
clauses
An
tenable.
exception
39,
to
basis
contained
of
in
goods
of
are
the
goods
rate
locally
of
so
tax
in order
manufacturing
from
is clear
in
Art.
the
two
in meaning.
301
and
the
303 can be su st ai ne d on
if
the
conditions
satisfied.
by a p p l y i n g
into
the
de ri ve d
304 only
pr ov i s i o n
and
local
304
(1) of Art
a f fe ct ed
imported
be
declared
of Art.
latter
can
the Art.
in Cl.
that
manufactured
support
(a)
Cl.(a)
the
imported
e n co ur ag in g
the m a n d a t e
the d i s c r i m i n a t i o n
between
for
No
Cl
p r oh ib it io n co nt ai ne d
the
of goods
incentive
of Act
so
respondents' co nt en ti on
the case
an
not
goods
In
different
states
of
the
result
rates
Gu j a r a t
of
and
tax
goods
m a n u f a c t u r e d w i t h i n that state mu st be stru ck down. Ho we ve r
in
a very
V State
of
3 JL3.
, "taxes S.C. held may and sometimes do amount
to
recent
case
in M/s.
U.P. & other petitions
re strictions
but
immedi at el y
Dises
it is only
re st ri ct
trade
Elec tr on ic s
such
that
taxes
would
fall
Ltd.,
as
d i r e c t l y and
w i th in
the mischief
of ar ticle 301 of the Co ns ti tu ti on .
Part
XIII
of
isolation.
It
instrument
en vi sa gi ng
scheme
co nf er ri ng
relating
also
31a
is
the C o n s t i t u t i o n
to
confers
list
part
and
parcel
a federal
legisl at iv e
II
p l en ar y
1990 77 STC S.C. 82.
of
the
powers
of
India
a
cannot
single
be
read
in
constitutional
scheme and co n t a i n i n g a general
powers
Se ve nt h
on
of
in
respect
Sc he du le
the States
on
of
the
to raise
the ma tt er s
States,
revenue
ft
for
56
their purposes
and does
not
require
that every
Legislation of
the state must obtain the assent of the president.
The constitution of India is an organic document.
be
so
construed
that
it
lives
exigencies of the situation,
economically,
politically
expressions used
to
attempt
to
and
the
adapts
itself
to
the
in a growing and evolving society,
socially.
therein must,
solve
and
It must
The
therefore,
present
meanings
of
the
be so interpreted as
problem
of
distribution
of
power and rights of the different states in the union of India,
and anticipate
developing
comprehend
the future contingencies
organism.
The
the present at
that might arise
Constitution
must
be
in a
able
to
the relevant time and anticipate
the
future which is a natural and necessary corollary for a growing
the
living
organism.
adjudication.
bring
it
develop
Hence,
into
the
economic
For working
be
part
of
the
the economic development
equality
commitments or goals
land.
That must
with
unity
of
all
of
other
India
constitutional
of
the
states
is
one
State
and
of
of an orderly
society
thereby
the
the constitutional aspirations
to
major
of this
economic equality of
all the states is as much vital as economic unity.
If a taxing provision in respect of intra-state sale does
not
offend
article
301,
logically
it
would
not
affect
the
freedom of trade in respect of free flow and movement of goods
from one part of the country to the other under article 301 as
well.
57
Free-flow
necessarily
of
or
trade
generally
between
depend
two
upon
states
the
rate
does
of
tax
not
alone.
Many factors including the cost of 'goods play an important role
in
the movement of goods
mere
fact
goods
that
there
locally
a difference
is
manufactured
and
the
to another. Hence
from one State
in
the
of
rate
imported
those
tax
on
not
would
necessarily amount to hampering of trade between the two states
within the meaning of article 301.
Article 304 is an exception to article 301. The need
taking
resort
impugned
to
is hit
the
exception
by articles
will
301
and
arise
303.
only
If
if
it
for
the
tax
is not,
then
article 304 will not come into the picture at all.
The
various
imposition
political,
of
rates
economic
of
and
sales
social
tax
is
influenced
by
factors.
Prevalence
of
differential rates of tax on sales of the same commodity cannot
be
regarded
in
isolation
as
determinative
of
the
object
to
discriminate between one State and other. The object to article
301
is
to
prevent
discrimination
against
imported
goods
by
imposing tax on such goods at a rate higher than that borne by
local goods. The question as to when the levy of the tax would
constitute
factors
respect
discrimination
including
of
the
differentiation
"discrimination"
article 16,
involves
the
is
of
and
on
not
not
303 and 304
an
depend
rate
sale
is
would
element
used
tax
which
the
it
a
item
is
in
article
14
goods
in
The
word
but
and
of
of
Every
in article
intentional
variety
levied.
discrimination.
(a). When used
of
upon
is
used
in
304 (a),
it
purposeful
30
differentiation
thereby
creating
an
economic
barrier
and
involves an element of an unfavourable bias.
Where the general rate applicable to the goods locally
made and on those imported from other states
nothing more, normally and generally,
is the same,
is to be shown by the
state to dispel the argument of discrimination under article
304 (a), even though the resultant tax amount on imported goods
may be different.
The granting
special class
of
exemption
from
for a limited period
tax by a state
to a
on specific conditions,
while maintaining the general rate of tax on goods manufactured
by all the producers in the state who do not fall within the
exempted category at par with the rate applicable to imported
goods,
does
not
interfere
with
the
freedom
of
trade
and
commerce envisaged by article 301.
If the power of granting exemption from tax is exercised
in a colourable manner intentionally or purposely to create
unfavourable
bias
by
locally manufactured
prescribing
goods
either
a
in
general
the
lower
shape
rate
on
of general
exemption to locally manufactured goods or in the shape of a
lower rate of tax, such ah exercise would be struck down by the
courts.
Held accordingly, (i) that Notification No. ST-II-7558 /
X-9(208)-1981 U.P. Act XV-48-Order~85 dated December 26, 1985,
59
issued by
the U.P. State Government under section 4-A
of the
U.P. Sales
Tax Act, 1948 and Notification No. ST-II/8202/
(208)-1981
issued by that Government under section 8(5)
X-9
of the
Central Sales Tax Act, 1956, did not interfere with the freedom
of trade as contemplated. by article 301 of the Constitution,
because
(a) those producers or manufactures
in the state who
did not come within the ambit of the notifications had to pay
tax in respect of their goods at the general rate prescribed
and
there was
no
differentiation
or
discrimination
qua
the
imported goods; and (b) the exemption therein was restricted to
production
of
specified
goods
within
certain
specified
districts and was for a limited period of five or seven years
only; and
(ii) that Notification No. S.O. 55/P.A. 46/48/S.5/Amd. /
86
dated
December II,
1986,
issued
by
the
PunjabState
Government did not interfere with the freedom of trade because
of the prevailing circumstances
in that State;
Gujarat
and
fully
whereas
Punjab was comparatively backward and
Maharashtra
were
the states of
developed
industrially
the incentives
were granted to counteract the shifting of industries to other
States.
claim
Further,
only newly setup industries were eligible to
the benefits
years and
thereunder
that also only
r
for a
limited
period
of
if they strictly complied with
five
the
conditions set out therein.
Held also, that similar notifications issued for Goa and
Karnatak did not violate article 301.
60
A notification of the State Government granting exemption
under
the rulemaking powers conferred on the Government by the
State Legislature is the exercise of legislative power.
BY THE
cannot
with
COURT
: "A backward
parity
engage
in
State
or
a disturbed
competition
with
State
advanced
or
developed states. Even within a state,
there are often backward
areas
some
are
which can
granted.
If
be developed
the
only
incentives
in
if
the
special
form
of
incentives
subsidies
or
grant are given to any part or unit of a state so that it may
come but
of its
limping or infancy
to compete as equals with
others,
that does not and cannot contravene the spirit and the
letter
of
Part
XIII
of
the
Constitution.
permissible only if there is a valid reason,
However,
this
is
that is to say, if
there are justifiable and rational reasons for differentiation.
If there is none, it will amount to hostile discrimination."